Conventional Purchase
A conventional purchase loan is the most common mortgage used by homebuyers, often because it provides a broad range of affordable options.
The better your credit, the more options you’ll have with a conventional purchase loan, including how much of a down payment you’d like to use, the length of your loan, and how you pay mortgage insurance and closing costs.
Benefits of a Conventional Purchase
River City Mortgage can help you decide what loan can help you afford your home. Conventional purchase loans are not government-insured or guaranteed. Instead, they meet the standard down payment and income requirements established by the Federal National Mortgage Association (FNMA or Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). These organizations help fund the U.S. housing market.
These standards require a higher credit score to qualify but they also provide you with more options for determining your down payment, closing costs, and monthly payments.
Choose Your Renfiance Goal
Only requires a 3% down payment
Down payment of 20% or higher eliminates PMI
Option for PMI buy-out with down payment of 5% or more
Options for no out-of-pocket closing costs
Fewer fees and penalties
How It Works
With a conventional purchase loan, some options are similar to an FHA loan. However, if you have a higher credit score, there are additional benefits to a conventional purchase loan that may make it the most affordable option.
With both conventional purchase and FHA loans, you can choose a 30-year, 20-year, or 15-year term length with a fixed-rate.
With good credit, a conventional mortgage will likely provide a better interest rate and more flexible options for other costs of your loan. These factors impact the life of your loan and can make your closing costs and monthly payments cheaper.
You can also use a conventional mortgage to purchase additional properties, such as a second home, vacation home, or rental. This differs from FHA loans, which are meant to finance a primary residence.
To qualify you’ll need the following:
- Documentation of consistent income
- Employment verification and history
- Down payment of at least 3%
- Debt-to-income ratio at or below 50% as qualified through automated underwriting
- Monthly mortgage insurance required with down payment of less than 20% until loan-to-value ratio reaches 80%
The flexibility of a low-down-payment option comes with an added monthly cost. If your down payment is lower than 20% of your home’s value, you’ll need to pay for Private Mortgage Insurance (PMI). This protects the lender’s investment in your home. Once you’ve paid down your loan to gain 20% equity in your home, your PMI can be removed. This is an advantage of conventional purchase loans, as FHA loans require mortgage insurance to be paid over the life of the loan.
Is a Conventional Purchase Loan Right for You?
These answers to home buyer’s commonly asked questions may help guide you. To take the next step, our loan officers can help you choose the most affordable loan for your home.
How much should my down payment be for a conventional purchase loan?
The amount of your down payment with a conventional purchase loan depends on many factors. This includes how much money you’ve been able to save for a down payment, as well as how much you want to invest in your new home purchase and how that will affect the overall affordability of the loan.
Typical down payment amounts are listed below. These are the required percentages you would pay of your home’s value, for various options and scenarios:
- 3% minimum down payment for first-time homebuyers
- 3% to 5% down payment if you’ve purchased a home before
- 5% down payment or more to qualify for a PMI buy-out
- 10% down payment for buying a second home
- 15% down payment potentially, if your property is not a single-family home
- 20% down payment to eliminate PMI
With many options and factors at play, our loan officers can help you discuss these options early on in your purchasing process.
Is a conventional home loan better for me than an FHA loan?
Conventional Purchase loans offer flexible down payment options similar to FHA loans. However, if you have a higher credit score and down payment, a conventional purchase loan likely will provide you with better mortgage insurance options and a lower interest rate than an FHA loan, making your monthly payments cheaper.
An FHA loan may be the better option for those with lower credit scores to finance a home while still being offered competitive interest rates and options for low down payment amounts.
What are the closing costs for a conventional purchase loan?
Beyond the amount of your mortgage that will finance your home, and your down payment, there are additional fees and costs when you close your loan. The closing costs cover expenses such as loan origination fees, title insurance, and an appraisal. They typically range between 2% to 4% of your loan amount.
For example, if your loan is $250,000, closing costs could range from $5,500 to $10,000. There may be options to have the seller cover some closing costs or to roll these costs into your loan, to pay them over time.
What are the loan limits for conventional purchase mortgages?
Fannie Mae and Freddie Mac set loan limits each year, which can be viewed on the Federal Housing Finance Agency’s website. In 2021, a homebuyer can borrow $548,250 with a conventional purchase loan, which is over $35,000 more than the loan limit in 2020. This differs in high-cost areas and certain states, reaching as high as $822,375 in some locations.
Can I refinance a conventional purchase loan for a new interest rate and terms or to borrow from my home’s equity?
Yes, conventional purchase loans can be refinanced to make your home more affordable over time. There are flexible options to borrow up to 80% of your home’s equity to pay for other expenses, as well as to potentially lower your interest rate, remove mortgage insurance, and adjust your term length, which can make your monthly payments more affordable.
